As healthcare costs rise, many employers are especially burdened by high-cost dependent claims, which can account for over 60% of total plan expenses. A Spousal Incentive Health Reimbursement Account (SIHRA) helps employers reduce this burden by incentivizing spouses (and even employees) to join a different group plan, freeing up budget without sacrificing care.
By offering tax-free reimbursements for out-of-pocket medical expenses, SIHRA plans give employers a strategic, low-disruption way to control costs while still supporting their workforce.
Comprehending SIHRA Plans
With health plan premiums continuing to rise, many employers seek ways to meet employee needs while containing costs. While SIHRA plans are not as common as other health plans offered by businesses, successful implementation can lead to lower premium costs for fully insured coverage and reduced medical expenses for self-funded plans.
SIHRAs are entirely funded by employers, similar to traditional HRAs. These account-based plans provide tax-free reimbursements for medical expenses that meet certain qualifications. Employees’ spouses are incentivized to enroll in a health plan offered by their own employer. By shifting dependents or even employees to a spouse’s plan, employers reduce exposure to large medical claims, particularly helpful for self-funded plans where high-cost claims directly impact the bottom line.
Basic SIHRA Structure
Combining a Health Reimbursement Arrangement (HRA) with a spousal incentive, SIHRA plans offer individuals financial security and peace of mind. With this strategy, the employer contributes to the HRA account, allowing employees to later reimburse themselves for qualifying medical expenses.
SIHRA differs from other health plans because it focuses on working spouses of employees who opt out of their partner’s health insurance and enroll in coverage through their own employer. That said, participation isn’t limited to the spouse.
In some cases, the employee can waive their employer coverage and join their spouse’s plan, still qualifying for SIHRA reimbursements for out-of-pocket costs. This added flexibility gives companies more ways to lower plan costs without reducing employee support, while also capping their financial liability at a defined reimbursement limit rather than facing potentially unlimited claims.
Legal Framework
Plans must meet certain IRS regulations outlined under the Internal Revenue Code’s Section 213(d) regarding plan documentation, contribution limits, and eligible expenses.
Employers are legally required to comply with several laws under SIHRA plan regulations, especially non-discrimination rules and privacy protections. Applicable laws include The Employee Retirement Income Security Act (ERISA), The Affordable Care Act (ACA), and The Health Insurance Portability and Accountability Act (HIPAA).
Tax & Financial Advantages
Employers need to be mindful of plan spending when establishing their budgets. SIHRA plans offer a cost-effective way for employers to offer healthcare plans that leverage tax advantages and propose flexible funding options, all of which can reduce expenses while improving employee satisfaction.
Cost Control Benefits
SIHRAs provide employers with a structured yet flexible approach to managing healthcare expenses. Unlike group health plans, SIHRAs allow businesses to set fixed reimbursement limits to achieve more predictable costs without the risk of escalating premiums.
Employers have full control over funding levels and can determine how much to allocate for annual employee medical expenses. These plans can also help minimize waste and optimize budget allocation, as unused funds typically remain with the employer.
Tax Implications
Companies that implement SIHRAs can enjoy a range of tax advantages that benefit employers and employees. Employers benefit by funding reimbursements with pre-tax dollars, reducing payroll tax liabilities and overall healthcare costs. SIHRA reimbursements are tax-free for employees, meaning they can use the funds for qualified medical expenses without increasing their taxable income.
These plans can also help businesses comply with IRS guidelines while maximizing savings. Proper documentation and adherence to IRS regulations allow employers and employees to leverage these tax benefits while maintaining full compliance.
Implementation and Management
Implementing and managing a SIHRA plan requires careful planning, compliance with regulations, and ongoing administration. Many steps are involved in the process, such as setting reimbursement limits, confirming proper documentation, and establishing a structured approach for best practices and efficient SIHRA management.
Setup Process
Setting up a spousal-incentive health reimbursement arrangement involves several essential steps to maintain compliance and efficiency. Steps may include the following:
- Define Plan Structure – Determine reimbursement limits, employee eligibility, and covered expenses in accordance with IRS guidelines.
- Draft a Plan Document – Create a formal written plan outlining the plan’s terms, including contribution limits and eligible expenses.
- Confirm Compliance – Verify that the plan complies with IRS, ACA, ERISA, and HIPAA regulations to avoid penalties and create tax advantages.
- Communicate with Employees – Clearly explain the plan details, including how reimbursements work and what expenses qualify.
- Set Up Administration – Implement a system for processing reimbursements, tracking expenses, and maintaining proper records.
- Monitor and Adjust – Regularly review plan performance, adjust funding levels as needed, and continue to verify ongoing compliance with regulatory requirements.
Administrative Requirements
Ongoing management of a SIHRA plan involves maintaining accurate records, processing reimbursements efficiently, and verifying compliance with IRS and ACA regulations. Employers must track contributions, document expenses, and provide required reporting. Regular plan reviews and employee communication are important for keeping the program efficient and compliant.
Design Your Perfect SIHRA Plan With New City Insurance
As you head toward the open enrollment season, SIHRAs may offer a way for your company to reduce your overall health plan costs. If you’re ready to set up a SIHRA plan, our team of professionals guides you through every step. Contact New City Insurance today to get started and provide your workforce with a flexible, tax-advantageous healthcare solution.